- The U.S. has approved the first exchange-traded funds (ETFs) that hold bitcoin directly, potentially attracting more mainstream investors.
- These ETFs, similar to gold ETFs, simplify bitcoin investment by eliminating the need for a digital wallet or crypto exchange account.
Understanding the Concept of Spot Bitcoin ETFs
Recently, the U.S. regulators have greenlit the first batch of exchange-traded funds (ETFs) that directly hold bitcoin, a decision eagerly anticipated by crypto enthusiasts. Managed by prominent asset managers like BlackRock and Fidelity Investments, these ETFs aim to introduce mainstream investors to bitcoin in a more familiar format.
How Do These Bitcoin ETFs Work?
A “spot” bitcoin ETF is essentially a fund that holds actual bitcoin on behalf of its investors. The term “spot” indicates the possession of real bitcoin, as opposed to derivatives tied to its price. The value of the ETF’s shares is expected to align with the fluctuations of bitcoin’s market price.
The Evolution of Bitcoin ETFs
While bitcoin futures-based ETFs, tracking the digital currency’s price, have been around since 2021, the SEC had initially resisted the approval of spot bitcoin ETFs due to concerns about market manipulation in the spot bitcoin market. The approval of these ETFs represents a significant shift in the regulatory landscape, potentially paving the way for broader acceptance and investment in cryptocurrency.
The Mechanics of Bitcoin ETF Operation
The new bitcoin ETFs function as trusts managing pools of bitcoin and issuing shares. Market makers play a crucial role in ensuring that the price of ETF shares accurately reflects the value of the underlying bitcoin. Authorized participants, including big names like Jane Street Capital and JPMorgan Chase, help adjust the supply of ETF shares in response to investor demand. They deal in cash with the trust, facilitating the creation and redemption of share baskets, thus maintaining equilibrium in the market.
The Custody and Security of Bitcoin ETFs
Most of these ETFs rely on third-party firms for buying and selling bitcoin as needed. Initially, there were discussions of an “in-kind” model for handling bitcoin transactions, but regulatory concerns led to the adoption of a cash model. The new bitcoin ETFs also address security concerns by using third-party custodians like Coinbase to store their bitcoin holdings in “cold storage” – offline and secure from hacking threats.
Cost Implications for Investors
Investing in these bitcoin ETFs involves an annual fee, varying from 0.2% to 1.5%, with some offering an initial zero-fee period to attract investors. The ease of investing, combined with managed security risks, makes these ETFs an appealing option for individuals looking to invest in bitcoin without the complexities of direct cryptocurrency dealings.